By Neeraj Agarwala
With global careers becoming increasingly common, many Indian residents receive income from foreign countries as consultancy fees or fees for technical services. While this may sound rewarding, the same income may be taxed abroad as well as in India.
Prevention of double taxation
To prevent double taxation, India grants tax relief under Section 90 or Section 91. Section 90 applies when there’s a Double Taxation Avoidance Agreement (DTAA) with the other country, and the credit is allowed as per the terms of that treaty. When India has no tax treaty with the country where income is earned, Section 91 gives unilateral relief and still allows credit for the foreign tax paid.
Quantum of Foreign Tax Credit (FTC)
The credit, however, is not unrestricted. An individual can claim FTC only up to the amount of tax payable in India on that same foreign income. If the foreign tax paid is higher than the tax calculated in India, the excess will not be refunded, nor can it be set off against tax payable on other income.
For example, suppose an Indian resident consultant receives $10,000 from a client in Canada. Canada deducts tax at 25%, amounting to $2,500. When the consultant files his Indian income tax return (ITR), this income must be reported, and Indian tax is computed on it. If the Indian tax liability on this works out to $1,800, India will allow credit only up to $1,800.
Penalties and interest not included
The credit is allowed only on income tax payable in India including cess and surcharge. However, penalties or interest are not allowed to be adjusted. Additionally, credit is available only when the foreign tax has been finally paid and is not under dispute. If at a later stage the foreign tax is refunded, revised, or reassessed, the taxpayer must accordingly revise the Indian tax liability and pay any differential amount in India.
Form 67
The taxpayer must also submit Form 67 electronically on the income tax portal. This form contains details of the foreign income, the foreign tax paid, and the country where it was paid. Supporting evidence such as a foreign tax withholding statement, pay slips showing tax deductions, or a certificate issued by the foreign tax authority must be provided. Without Form 67, your claim for credit may be denied even if tax was paid abroad.
Income tax return
Individuals have to first report the foreign-sourced income in Schedule FSI (Foreign Source Income). Once Schedule FSI is completed, it will then be automatically populated in Schedule TR (Tax Relief), where the foreign tax credit is computed. The details entered in these schedules should be consistent with the disclosures made in Form 67.
The writer is partner, Nangia & Company
